Even Uber Can't Live Up to the Expectations It Set

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”Read More.

In record time, “Uber for X” has gone from big-money venture-capital pitch to tired old joke. Everyone wants to write an app that disrupts some big industry. How many people are succeeding?

Not many, argues Farhad Manjoo. Parking, grocery shopping and takeout are just a few of the many industries that have been pitched as ripe for disruption, offering consumers better service at lower cost. And that pitch actually seemed to make sense, when services were still in the first flush phase of their VC infusions, and offering their product at a loss in order to build a labor force and customer share.

Now, however, they look a lot more like high-end services for affluent consumers willing to pay a premium for convenience. There’s nothing wrong with that, of course. If high-end consumers are willing to pay someone to bring them stuff, and that someone is happy earning the money, then this is great news for the American economy. On the other hand, letting the highest-income consumers pay someone to pick out their groceries, rather than picking them out themselves, is not exactly a revolutionary disruption of the grocery industry. It’s a moderately convenient service delivered at a premium cost.

Why don’t these businesses look more like Uber, which has simultaneously increased the availability and convenience of taxi services, while lowering the cost? Manjoo suggests that it’s because Uber was disrupting a taxi cartel that was able to extract significant economic rents from customers, made possible by heavy protection from local regulators.

Groceries, parking and takeout, on the other hand, are more like normal competitive industries. Sure, an app might streamline things a bit, adding enough value to let businesses expand their reach or lower their prices a bit. But since the app itself has to take a cut in order to pay back those investors, there actually isn't much room to deliver massive savings.

This explanation makes sense to me. But a niggling doubt remains at the back of my mind: Does even Uber live up to the hype of being "Uber for X"?

I’ve been writing about Uber since close to its inception, and I’m a big fan of the service. Its original incarnation as a method of summoning black cars was revolutionary for those of us who live in neighborhoods without reliable taxi service or a clear and safe route from the subway at night. (This no longer describes my neighborhood, actually, since there’s been considerable residential development over the last few years. But at the time Uber launched, my nearest Metro stop was in the middle of a sea of office buildings that tended to be deserted after 7 p.m.)

But in the years since its launch, Uber has focused on making taxi service not merely more easily available, but also cheaper. UberX is consistently cheaper and more reliable than a DC taxi, and that’s pretty much what I hear from people in every other city where Uber operates, with the lone exception of London.

Part of this success is undoubtedly because local taxi cartels had a lot of inefficiency built into them. The value of a New York taxi medallion has cratered since the arrival of Uber, and that represents economic rents that were being transferred from drivers and customers to the medallion owners. Since those medallions previously sold for upwards of a million dollars, there’s room for Uber to take a healthy portion of those rents while still offering drivers and passengers a better deal.

But the more I talk to Uber drivers, and read the message boards, the more I wonder if we aren’t in a bit of a golden moment for Uber -- the moment while there’s still a lot of investment money to subsidize operations, and before drivers realize that wear and tear on their cars is actually an enormous hidden cost that needs to be accounted for in calculating their hourly earnings.

I say this because I’ve started to hear drivers talk about people they know who dropped out because of the wear and tear on their cars -- something that I never heard a couple of years back, even though I often asked about it. (Yes, in the height of all journalistic clichés, I usually interview drivers.) It also shows up on bulletin boards like Glassdoor.com. The volume of complaints about wear and tear on the cars seems to be rising, often coupled with complaints about the fare and reimbursement cuts that Uber has pushed as it tried to break even.

This is obviously far from scientific data, but it makes a certain amount of sense. Most people are not accountants or small business owners, and it doesn’t necessarily occur to them that they need to calculate their hourly wage for Uber driving net of tires, oil changes and depreciation on their vehicle, as well as gasoline and any costs they incur for having the car cleaned after some barhopper vomits in it. That may have enabled Uber to sign up people who were willing to drive for a lower price than they would if they were fully factoring in all their expected costs.

But that’s a strategy that doesn’t last. The reason that I have been asking Uber drivers about it for so long is that, well, like I said, I usually interview drivers about their jobs. And taxi drivers, longtime professionals, are acutely conscious of the cost of replacing their tires, their oil and their vehicle. Which they need to do a lot more frequently than normal commuters.

I’m not accusing Uber of bad faith here; I’m just saying that over the past few years, the company has probably benefited from a pricing anomaly in the market for drivers. (Not to mention a recession that kept a lot of potential drivers un- or underemployed.) As information about the cost of vehicle maintenance spreads, that pricing anomaly will go away. At which point, it seems quite likely to me that either the pool of drivers will shrink, or the fares will have to rise toward something closer to what we pay for taxis.

That’s not the death knell for Uber, of course. It provided a valuable service even when it was just a virtual dispatch for black cars. UberX also adds real value to the market, although I think perhaps not quite as much value as passengers and drivers currently perceive. And they’ve continued to innovate, with ride-pooling, and things like takeout delivery services. I would be very surprised if the company were not around, and quite profitable, in 10 years.

But I wouldn’t be surprised at all to find that I’m not taking quite so many Ubers, as the prices rise to bring passenger demand into equilibrium with a willing and informed supply of drivers. The taxi industry will stay disrupted. But the resulting transformation may not exactly be a revolution.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”Read more